Revaluation of Assets and Reassessment of Liabilities

Introduction

Business organizations, particularly partnership businesses where partners retire or new partners are introduced need to revalue the assets and liabilities from time to time. Business organizations need to revalue their assets and reassess their liabilities from time to time because, with the passage of time, the values of assets and liabilities may change. This is particularly the case in partnership businesses where partners retire or new partners are introduced. Whenever the profit-sharing ratio in a partnership firm changes, the firm needs to value its assets and reassess the liabilities to remain up to date in terms of the current form of assets and liabilities. This article throws light on what the revaluation of assets and reassessment of liabilities mean and provides reasons why and how it is useful.

Profit and Loss Adjustment Account or Revaluation Account

As there must be a change of assets and liabilities when profit-sharing ratios change, partnership firms often need to revalue their assets and reassess their liabilities. This is done because any change in the value of assets and liabilities must be shared according to the previous profit-sharing ratio (PSR) in partnerships.

Usually, the revaluation of assets and reassessment of liabilities are shared in a particular account called Profit and Loss Adjustment Account or Revaluation Account. It can therefore be stated that a Revaluation Account is created to determine net loss or profit on the revaluation of assets and liabilities. The revaluation account also includes those items that are unrecorded in books.

A revaluation account is generally prepared in partnership firms at the time of admission of a new partner or in the case of the death or exit of a partner. The obtained Revaluation net profit or loss is generally transferred to the capital account of all the partners that comprise the deceased or retiring partners in the old profit-sharing ratio.

Reason to Revalue Assets and Reassess Liabilities

Revaluation of assets and reassessment of liabilities are not done just for the sake of updating records. Here are some reasons why the process is important for the partnership businesses.

• It is always useful to check whether the net assets of an enterprise are mentioned in the books of record at their current values. If the recorded value is under or over the current record it must be rectified.

• The same is applicable in the case of liabilities. If the current value of liabilities recorded in the books is over or under the actual value, the liabilities must be reassessed.

• Revaluation is also useful for unnoticed and unrecorded assets and liabilities from time to time. This may happen without any exit or admission of a partner. Some assets of an enterprise may get ignored even when there is no change in the partnership patterns. Revaluation of assets and liabilities may just be a formal choice to re-update the books of account.

• The profit or loss of each asset and liability found applicable during revaluation is moved to the revaluation A/c. The balance obtained in the process is transferred to the capital account of the old partners in accordance with their old PSR.

• In simpler terms, the revaluation A/c is credited with the increase in the value of each asset and decrease in its liabilities when there is a profit. It is debited with a decrease in assets and an increase in its liabilities is debited to revaluation A/c, it is a loss. Also, unrecorded assets are credited and unrecorded liabilities are debited to the revaluation account.

• Finally, if the revaluation account shows a credit (cr.) balance then, it indicates net profit and if there is a debit balance then it indicates net loss. These are also later transferred to the old partners’ capital account in the old ratio.

Certain Useful Terms Used During Revaluation

Increased To/ Raised To

This refers to the value of the asset or liability that has been raised to the adjustment amount. The recorded value in the revaluation account is the net difference between the amount adjusted and the amount shown on the balance sheet. The adjustment amount is generally recorded on the balance sheet.

Increased By/ Raised By

Increased by or raised by refers to the fact that the differential amount is already given in the adjustment. The adjustment has to be recorded because it is in the revaluation account and must be added to the value of assets and liabilities on the balance sheet.

Decreased To/ Written down To

This is the opposite of raised to and refers to the fact that the value of the asset or liability is reduced to the adjustment amount. The difference between the amount shown in the balance sheet and the adjustment amount is shown on the rectified side of the revaluation account. The adjustment amount in such a case is recorded on the balance sheet.

Decreased By/ Written down By

This is the opposite term in the meaning of increased by. It means that the differential amount is already given in the adjustment. The differential amount must be recorded, as it is in the revaluation account. It should also be deducted from the value of assets and liabilities on the balance sheet.

Valued At/ Taken At

Valued at or taken at indicates that the amount given in the adjustment or revaluation is the value of the assets or liability. When such an asset or a liability is unrecorded, then the total amount of adjustment must be recorded on the correct side of the revaluation account. It must be included on the balance sheet as well.

Key Takeaways

• Partnership firms need to revalue their assets and reassess their liabilities from time to time because, with the introduction and exit of members, the values of assets and liabilities may change.

• Revaluation is done because any change in the value of assets and liabilities must be shared according to the previous profit-sharing ratio (PSR) in partnerships.

• The revaluation of assets and reassessment of liabilities are shared in a particular account called Profit and Loss Adjustment Account or Revaluation Account.

• It is always useful to check whether the net assets of an enterprise are mentioned in the books of record at their current values. If the recorded value is under or over the current record it must be rectified.

Conclusion

Revaluation of current assets and reassessment of liabilities is a very important aspect of partnership businesses. As it is useful in determining the current state of the business organizations, it must be carefully learned and applied in the case of partnerships.

FAQs

Qns 1. What is meant by revaluation of assets and reassessment of liabilities?

Ans. Whenever the profit-sharing ratio in a partnership firm changes, the firm needs to value its assets and reassess the liabilities to remain up to date in terms of the current form of assets and liabilities. This is simply called revaluation of assets and reassessment of liabilities.

Qns 2. What is the main reason for the revaluation of assets and reassessment of liabilities?

Ans. Revaluation is done because any change in the value of assets and liabilities must be shared according to the previous profit-sharing ratio (PSR) in partnerships.

Qns 3. What is meant by a Revaluation Account?

Ans. The revaluation of assets and reassessment of liabilities are shared in a particular account called Profit and Loss Adjustment Account or Revaluation Account.